What if President Macron was frightened of China?

Emmanuel Macron and Xi Jinping during a bilateral meeting on G20 summit in Hamburg (July 8, 2017) // AFP PHOTO / IAN LANGSDON)

This interview was previously published in Asialyst. Reproduced with the kind permission of Joris Zylberman.

What is Emmanuel Macron’s strategy with regard to China? When will he make his first visit there? The French president has not yet set foot in the “Middle Kingdom” and, for the moment, he has not made any comment on how he perceives that country. He met his Chinese counterpart Xi Jinping for the first time on July 8th at the Hamburg G20, when the two leaders reaffirmed their commitment to putting the Paris climate agreement into effect, whereas Donald Trump was already inferring that he would not stick to it. Just before, on June 23th, the French president had failed to persuade his partners in the European Union to give more power to the Brussels Commission in the control of foreign investment, especially Chinese investment in Europe. But, since then, François Hollande’s former minister has not said a word about Xi’s country. This is what is held against him by David Baverez, an investor based in Hong Kong and author of Paris-Pékin Express, published by Editions François Bourin a few weeks before the presidential elections in May 2017. The book exhorts the next occupant of the Élysée Palace to take on his first day in the office the plane to the Chinese capital — rather than set off for Berlin. Six months after Emmanuel Macron’s election, David Baverez reiterates the same wake-up call.


David Baverez is a private investor, based in Hong Kong since 2012, from where he advises various start-ups. With qualifications from HEC and INSEAD, he previoulsy managed portfolios for Fidelity Investments in London and Boston, and then co-founded KDA Capital. In 2015, he wrote Génération tonique (published by Editions Plon), He is a regular columnist for the French press, writing for L’Opinion and Les Échos, as well as for Forbes and Medium.

In his latest book, Paris-Pékin Express, la nouvelle Chine racontée au futur président [Paris-Beijing Express, The New China As Recounted To The Future President], David Baverez — in no uncertain terms — sets about revolutionizing the French president’s foreign policy. In his eyes, we have to look at the political reality in China and disregard any classic categorizations. According to him, the country is a “démocrature” [a combination of democracy and dictatorship], a “mix of ‘cyberdemocracy’ on the one hand, through the boom in social media which puts the establishment under daily pressure, and of ‘dictatorship’ on the other other hand, controlled by a meritocracy that heads up the central power base. This singular model of ‘hard power’ — quite different from that of Russia or Turkey — is highly fluid and unstable.”

Last April, in your book Paris-Pékin Express, you called for the future president to go to China the day after his election. What do you think of Emmanuel Macron”s first steps?

David Baverez: Up to now, it has to be said that French diplomatic strategy with regard to China has rather been conspicuous by its absence! This is difficult to understand given the intelligence and opportunism of President Macron. It is even more regrettable in that there is an opportunity to be seized and some urgency to act. The president has prioritized the USA and the Middle East, whilst making the revitalization of Europe the cornerstone of his foreign policy. In this way, he is missing out on a historic opportunity presented by the collapse of the Anglo-Saxon “soft power”. The only country to come out of this on top is China — not continental Europe. Let’s be realistic about this: the reconstruction of Europe cannot be envisioned without thought having been given to the positioning of the “Old Continent” in relation to China’s rise to power. And yet, Emmanuel Macron is avoiding the issue at the very moment when it is becoming urgent to deal with it.

China : Emmanuel Macron is missing out on a historic opportunity presented by the collapse of the Anglo-Saxon “soft power”

How do you define this ‘urgency’ with regard to China?

The “New Silk Road” is a blatant example! In essence, and contrary to Chinese propaganda, this project is actually more of a political rehabilitation of this historic route than an economic one. Since the beginning of the year, China has only invested less than 10 billion dollars in the countries that this New Silk Road passes through. “At the same time”, it is building up an amazing amount of ”soft power” there, so much so that the eastern part of the globe seems to be turning nowhere else but to China. A stroke of genius! So President Macron is overlooking China at the very moment when it is urgent to respond to this “soft power” which is enabling China to carry out this amazing diplomatic hold-up. Less than 10 billion dollars on the table to annex de facto half of the globe — from Africa to Iran to Pakistan… the focus is now on China alone.

At the same time, urgency of a more positive nature has emerged on the economic front. Paradoxically, China seems to want to rid itself of Western businesses precisely at a time when it has never been in such need of the West. Every ten years, its economic model reaches its limits, as is the case now. Contrary to government propaganda, the rebalancing by speeding up the growth in domestic consumption is turning out to be more complicated than was foreseen. The last decade of growth came about mainly at the cost of soaring indebtedness — at twice the rate as in the West — which has added 100 points of debt to GDP, which cannot be sustained. Look at consumer credit amounting now to almost 100% of household income. This was indeed the recent message from Zhou Xiaochuan, the highly-respected governor of the Chinese central bank, the PBOC, and the man who for the last fifteen years has undoubtedly contributed the most to saving the world of finance. Whilst the 19th Communist Party Congress was going on in Beijing, Zhou called on his successor to be prepared to face up to a “Minsky moment”, the point where an over-indebted system finally finds itself obliged to face up to its imbalances.

In your opinion, what is the lever that will enable the Chinese economy to be rebalanced?

A healthy rebalancing can only come from improved productivity, which will reaccelerate the rise in salaries and domestic consumption. Any improvement in capital and labor productivity is necessarily dependent on technology. However, in many sectors, it is still the West that dominates technology these days. And the problem for the Chinese is that they cannot go looking for it in Donald Trump’s America. Over the past few weeks, the Committee for Foreign Investment in the USA (CFIUS) has been taking measures with regard to China that are even more protectionist. The only American technology left accessible to Beijing is technology that is largely overvalued, like Tesla. Tencent has recently been authorized to invest 2 billion dollars in Tesla — 1.6 billion of which Tesla immediately burned in only three months! Tesla produces only 100,000 vehicles per year, at a unit price of 100,000 dollars, whereas China needs 20 million electric vehicles every year at a maximum price of 5,000 to 10,000 dollars!

The French Prime Minister, Édouard Philippe, has spent a week in China every summer since 2010 in his capacity as Mayor of Le Havre, which is twinned with Dalian.

What can the French president do?

There is, in fact, a wide avenue of possibilities open to Emmanuel Macron! The problem is that he has never set foot in China, so his fear of facing Xi Jinping betrays his ignorance of a country that promises to be the leading economic power of the century. That said, the French should not lose hope: their Prime Minister, Édouard Philippe, has spent a week in China every summer since 2010 in his capacity as Mayor of Le Havre, which is twinned with Dalian. He knows what happens to France when it doesn’t adapt to globalization, for the port of Le Havre is only working at 25% capacity! In the meantime, President Macron prefers to put on a swagger in face of the collapse of the Anglo-Saxon “soft power” and to play on the fact the Angela Merkel’s power is being eroded… But it is definitely more dangerous for him to confront the three elements that, for thirty years, have been responsible for the success of the Chinese leadership: vision — China will be the leading world power in 2049; determination — currently taking back control over the Party and the army, and, in the near future, over China’s state-owned enterprises; and courage — making policies for the young and not for the old.

Isn’t it really paradoxical to see a country like China being led by old people but with the youth in mind, whilst in France, if nothing changes, we run the risk of having a young president still making an old man’s policies, by refusing to deal with the problems of the debt and public expenditure!

Looking at China dispassionately, studying both its strengths and weaknesses.

What should France’s commercial strategy be with regard to China?

France has to change its mindset. One either sees overweening arrogance — “Anyway, the Chinese economy is heading for disaster” — or, like Macron, an acknowledgment of weakness — ”They are too strong. I’d better give up.” Personally, I would recommend looking at China dispassionately and studying both its strengths and weaknesses. It has to be admitted that, as far as its strengths are concerned, it is already too late. But one should also make a list of the weaknesses of the Chinese system, for which we can offer several remedies. The main one is low labor productivity — only 25% of the level in the West — and low capital productivity — Chinese state-owned businesses produce only a 3% return on capital. The answer to this has recently been provided by Carlos Ghosn, the head of Renault, who has just signed a joint venture agreement with the Brilliance Group, one of the best Chinese automobile manufacturers and, worthy of note, a partner of BMW. Carlos Ghosn has correctly realized that the electric vehicle in China will first of all be developed in the utility vehicle sector, especially through orders from state-owned enterprises. Hence the alliance with Brilliance. Renault has acquired 50% of its utility vehicle operations, but for only one token yuan! Both parties have committed themselves to each investing 150 million dollars in cash, but with the French group in the driving seat!

This is proof that, if one takes the time to analyze Chinese weaknesses and if one talks tough to them, one can still come out on top! By waiting around so that you end up negotiating from a position of extreme weakness, you find yourself in a position like that of Peugeot with Dongfeng Motors, giving the Chinese access to leading French Research and Development at a huge discount. There is a clear message here for President Macron: the automobile industry is a splendid illustration of the urgency and the opportunity with regard to China. If you don’t go there now, you will end up as Jean Yanne did in the movie Les Chinois à Paris (Chinese in Paris) [a comedy about a hypothetical invasion by the Chinese]!

What are the most promising sectors for France in China?

A careful analysis has to be made of the “Made in China 2025” plan, which focuses on ten or so industries that are being prioritized by the Beijing government. In each case, it is up to us to identify where France has unique expertise in the case of bottlenecks in the value chain. This is what Carlos Ghosn did in the case of the electric utility vehicle, which is one of main focuses of the Chinese plan. The environment is another sector where, in the absence of any credible American competition, we should identify bottlenecks in the Chinese value chain and in which we, the French, are world leaders. Then, we should demand top prices for this expertise, so as to reflect the value added.

What other sectors are there?

Potentially, all the service industries. Take education, for example. All our grandes écoles [prestigious institutes of higher education] are virtually bankrupt at the moment as they depend on public grants that cannot be sustained in the future. China produces 7 million graduates every year, and yet only 7% of them will have the chance to study abroad. There remains, therefore, an “addressable” market of 93% of Chinese graduates in the new and booming sector of online education, which is the only economically viable model for educating the future elite of emerging countries. Similarly, there is the field of culture. The Abu Dhabi Louvre will be bringing France a billion Euros whilst contributing a little to the spread of our culture. Over the past few years, China has opened a new museum every day, but, unfortunately, it has very few artworks to put on show because of the Cultural Revolution. In Paris, the Beaubourg Centre only exhibits 1% of its collection every year, so why not organize a similar cooperation with China… for a billion Euros!

How should we regard Chinese investment in France?

The thing is not to prohibit Chinese investment in France. Rather, we should be delighted if the Chinese buy up our companies for high prices and then develop them. Take, for example, the hotel business of the Société du Louvre. It used to belong to the Taittinger family who preferred dividends to investment. Jinjiang International has been its owner since 2015 and is financing all necessary investments, to the great satisfaction of the French managers. Jinjiang is a state-owned group but is managed by the Shanghai city council as a private company, with a long-term industrial approach. And, for the Société du Louvre, there is the expected bonus of 350 Campanile hotels opening in China over the next three years!

Let me take another example: Kuka in Germany was the last remaining independent European leader in robotics. The Chinese group Midea bought it in 2016 for 4.5 billion euros. The Germans had quadrupled the group’s value in the preceding three years by robotizing all of the Chinese automobile industry. They were therefore able to be handsomely rewarded by the Chinese themselves for penetrating the Chinese market in one of the country’s priority sectors. Whilst obtaining guarantees that the head office would remain in Germany until 2022 and that no German jobs would be lost in this booming sector. That is how we should be building the “New Digital Silk Road” between Europe and China. We just have to remind our Chinese friends that a road can only be really profitable if traffic flows well in both directions.

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